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Management Buyouts

By Ensors Team
24th Mar 2011

A management buyout can be the ultimate test of your business skills.

It can give you the chance to show that you have the ideas, vision and ability to transfer an organisation and deliver results. But to pull off a successful MBO you may have to put your career and your own money at risk. You will also need the drive and enthusiasm to persuade other investors that your plans will work.

Is this company a suitable candidate for an MBO?

MBOs are often highly geared so the company needs to be able to generate cash and grow the bottom line in the short to medium term. Your idea may be viable in the long run, but you may find backers hard to come by if you cannot show that the business will be able to cover short term finance costs and deliver a return to investors.

Is the management team likely to receive backing from investors?

Investors will want to back a management team that has a strong track record in the industry. Potential backers will ask why you think your management team can deliver better results than the current owners. You must be forward looking with a strong strategic goal for the business.

What will we have to pay for the company?

There is no magic formula – the assessment of what you will have to pay depends on a number of factors. The state of the balance sheet and profit and loss account are obviously very important, as are the future prospects for the business. However the simple question of whether or not the owners want to sell can be paramount. In the end, price is a matter of skilled negotiation.

Where does the money come from?

The finance for a typical MBO will include the management team’s own resources, equity from institutional investors and loans and bank borrowing of some sort. It is important to remember that different types of investor will want different rewards from the deal.

How do we approach the existing owners?

Negotiating with your employer is not easy but you will have to do it at some stage. There is the immediate fear of “getting the sack” for asking about an MBO, so you could instruct your advisers to make the initial approach. But be careful not to release any financial information to outsiders without clearance from the parent company.

What proportion of the shares will the managers keep?

This is one of the key issues to discuss with your investors. The proportion of shares held by the management team will vary from deal to deal. It depends on the structure of the deal rather than the amount of money your team puts in.

How do we put the business plan together?

Your plan must identify the strengths of the business, its future opportunities, and why the business will be more successful than its competitors.   It is important that the business plan is the work of the management team. It must put across your message and stress the skills you have as a team. It is essential that you get the plan right, and our expertise will help here.

Which investors and banks should we approach?

Investors and banks use their own criteria to decide whether a deal is attractive. Some will only look for deals in a certain industry; others will reject any deals below a certain size. You must make sure you know which backers are likely to consider your proposition before you go into the market.

Have we been offered a good deal by the investors?

You should always remember that the members of the management team are putting their careers on the line and their own money at risk. In exchange, you should expect a higher return than other investors. But do not get greedy – investors do not like to see MBO teams paying themselves excessive salaries.

Ensors corporate finance team are experienced in acting for both management buyout and buy-in teams. We can guide you through all the pitfalls above, and offer a total solution.

For further information:

If you would like to find out more about the services we offer and how we can help your business, please contact David Scrivener